Question 1

Even though the compliance the Cadbury Code of Best Practice is voluntary,

Accepted Answer

A)  the Cadbury Code has made a significant impact on the internal governance mechanisms of U.K.companies.
B)  the job security of U.K.chief executives has become more sensitive to the company performance, strengthening managerial accountability and weakening its entrenchment.
C)  joint CEO/COB (chief executive officer and chairman of the board)  positions declined.
D)  all of the above D

Question 2

The major components of the Sarbanes-Oxley Act are:

Accepted Answer

A)  accounting regulation-The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients.
B)  audit committee-The company should appoint independent "financial experts" to its audit committee.
C)  internal control assessment-Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention.
D)  executive responsibility-Chief executive and finance officers (CEO and CFO)  must sign off on the company's quarterly and annual financial statements.If fraud causes an overstatement of earnings, these officers must return any bonuses.
E)  all of the above E

Question 3

When company ownership is diffuse,

Accepted Answer

A)  a "free rider" problem discourages shareholder activism.
B)  the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management.
C)  few shareholders have a strong enough incentive to incur the costs of monitoring management.
D)  both a and c are correct D

Question 4

While debt can reduce agency costs between shareholders and management,

Accepted Answer

A)  excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem.
B)  with debt financing companies can misuse debt to finance corporate empire building.
C)  both a and b
D)  none of the above

Question 5

Why is it rational to make shareholders "weak" by giving control to the managers of the firm?

Accepted Answer

A)  This may be rational when shareholders may be neither qualified nor interested in making business decisions.
B)  This may be rational since many shareholders find it easier to sell their shares in an underperforming firm than to monitor the management.
C)  This may be rational to the extent that managers are answerable to the board of directors.
D)  All of the above are explanations for the separation of ownership and control.

Question 6

The key to extracting private benefits of control that are not shared by other shareholders on a pro rata basis is to

Accepted Answer

A)  become a large shareholder and acquire control rights exceeding cash flow rights.
B)  buy a large block of nonvoting shares.
C)  sell your shares in a tender offer.
D)  force the firm into bankruptcy.

Question 7

What is the difference between control rights and cash flow rights?

Accepted Answer

A)  Since all shareholders benefit only from pro-rata cash flows, control rights and cash flow rights are the same thing.
B)  Large investors may be able to derive private benefits from control, thus control rights can exceed cash flow rights.
C)  Cash flow rights are more important than control rights since the only reason to invest in anything is to generate cash.
D)  None of the above

Question 8

A complete contract between shareholders and managers

Accepted Answer

A)  would specify exactly what the manager will do under each of all possible future contingencies.
B)  would be an expensive contract to write and a very expensive contract to monitor.
C)  would eliminate any conflicts of interest (and managerial discretion) .
D)  all of the above

Question 9

Financial development can contribute to economic growth in what way(s)?

Accepted Answer

A)  Financial development enhances savings.
B)  Financial development channels savings toward real investments in productive capacities.
C)  Financial development enhances the efficiency of investment allocation through the monitoring and signaling functions of capital markets.
D)  All of the above.

Question 10

For firms with free cash flows,

Accepted Answer

A)  debt can be a stronger mechanism than stocks for credibly bonding managers to release cash flows to investors.
B)  equity dividends can be a stronger mechanism than bonds for credibly bonding managers to release cash flows to investors.
C)  preferred stock dividends can be a stronger mechanism than bonds for credibly bonding managers to release cash flows to investors.
D)  none of the above

Question 11

Following the adoption of the Cadbury Code of Best practice,

Accepted Answer

A)  joint CEO/COB (chief executive officer and chairman of the board)  positions declined.
B)  there has been a significant impact on the internal governance mechanisms of U.K.companies.
C)  CEOs have become more sensitive to company performance, strengthening managerial accountability and weakening managerial entrenchment.
D)  all of the above

Question 12

The public corporation has a key weakness:

Accepted Answer

A)  the conflicts of interest between bondholders and shareholders.
B)  the conflicts of interest between managers and bondholders.
C)  the conflicts of interest between stakeholders and shareholders.
D)  the conflicts of interest between managers and shareholders.

Question 13

Following the adoption of the Cadbury Code of Best practice joint CEO/COB positions declined

Accepted Answer

A)  from 27 percent of the companies before the adoption to 15 percent afterwards.
B)  from 37 percent of the companies before the adoption to 15 percent afterwards.
C)  from 47 percent of the companies before the adoption to 15 percent afterwards.
D)  from 57 percent of the companies before the adoption to 15 percent afterwards.

Question 14

Suppose in order to defraud the shareholders,a manager sets up an independent company that he owns buys one of the main company's inputs of production from this company.He would be tempted to set the transfer price

Accepted Answer

A)  below market prices.
B)  above market prices.
C)  at the market price.
D)  in accordance with GAAP.

Question 15

The cost of compliance with the Sarbanes-Oxley Act

Accepted Answer

A)  is a small amount, since most firms were playing by rules to begin with.
B)  disproportionately affects small firms.
C)  is paid for with tax credits for firms found to be in compliance.
D)  both a and c

Question 16

In a public company with diffused ownership,the board of directors is entrusted with

Accepted Answer

A)  monitoring the auditors and safeguarding the interests of shareholders.
B)  monitoring the shareholders and safeguarding the interests of management.
C)  monitoring the management and safeguarding the interests of shareholders.
D)  none of the above

Question 17

While debt can reduce agency costs between shareholders and management,

Accepted Answer

A)  debt can create its own agency costs.
B)  this only happens at extreme levels of debt.
C)  this does not work for firms in mature industries with large cash reserves.
D)  none of the above are true

Question 18

The Sarbanes-Oxley Act of 2002

Accepted Answer

A)  applies to all U.S.firms.
B)  applies to listed companies.
C)  applies to issuers whose securities are traded on an over-the-counter bulletin board.
D)  all of the above.

Question 19

In the United States,it is not uncommon for the same person to serve as both CEO and chairman of the board.

Accepted Answer

A)  This situation must not have much conflict of interest since it is common.
B)  This situation has a built-in conflict of interest.
C)  This is only legal if that individual owns a controlling number of shares in the firm.
D)  None of the above.

Question 20

The key strengths of the public corporation is/are

Accepted Answer

A)  their capacity to allow efficient risk sharing among many investors.
B)  their capacity to raise large amounts of funds at relatively low cost.
C)  their capacity to consolidate decision-making.
D)  all of the above

Exam 4: Corporate Governance Around the World

Even though the compliance the Cadbury Code of Best Practice is voluntary,

The major components of the Sarbanes-Oxley Act are:

When company ownership is diffuse,

While debt can reduce agency costs between shareholders and management,

Why is it rational to make shareholders "weak" by giving control to the managers of the firm?

The key to extracting private benefits of control that are not shared by other shareholders on a pro rata basis is to

What is the difference between control rights and cash flow rights?

A complete contract between shareholders and managers

Financial development can contribute to economic growth in what way(s) ?

For firms with free cash flows,

Following the adoption of the Cadbury Code of Best practice,

The public corporation has a key weakness:

Following the adoption of the Cadbury Code of Best practice joint CEO/COB positions declined

Suppose in order to defraud the shareholders,a manager sets up an independent company that he owns buys one of the main company's inputs of production from this company.He would be tempted to set the transfer price

The cost of compliance with the Sarbanes-Oxley Act

In a public company with diffused ownership,the board of directors is entrusted with

While debt can reduce agency costs between shareholders and management,

The Sarbanes-Oxley Act of 2002

In the United States,it is not uncommon for the same person to serve as both CEO and chairman of the board.

The key strengths of the public corporation is/are